Part shortages are a common occurrence, no matter the industry. A reality that all procurement professionals deal with is that part availability ebbs and flows. This cyclic nature is a normalcy, but there of course are exceptions—as well as catalysts—that can kickstart a rise or fall in part availability. No catalyst has been more clearly seen and widely felt than that of the COVID-19 pandemic and its ever-sprawling impacts across global supply chains. One industry hit particularly hard during this time was the automotive industry as it faced unprecedented semiconductor shortages.
Cleat Kimbrough, President, EMEA at Smith, and Renato Souza, Vice President of Global Business Development at Smith, spoke with Supply Chain Connect on the chip shortage crisis faced by the automotive industry, as well as to how Smith was able to successfully navigate the dilemma by leaning on the company’s experience and partnerships.
The Auto Industry Faces a Chip Shortage
“If you look at it globally, back in March of 2020 when COVID came around, a lot of the automotive sites had to shut down,” Souza recalls. “When they came back online in the summer of 2020, that is when the crisis hit—when they were trying to get chips, and they were finding out that there were no chips available for their industry in particular.”
“In Europe, we didn’t see the shortage materialize until the early second half of 2021, around July or August,” Kimbrough adds. “Then it really materialized, and it went for a solid two years. As the recovery was already well in place in 2023, we were still experiencing a lot of demand from the automotive customers all the way until the beginning of the second half of 2023.”
The Ramifications of the Shortage
The impact of the chip shortage was massive across the entire global automotive industry.
“Some estimated numbers: In 2021, about 11.3 million units of production was lost on cars; in 2022, about 7 million; in 2023, about 1.6 million,” Souza says. “From a revenue perspective, the auto industry lost about $210 billion of revenue just in 2021.”
Production was critically wounded as cars were unable to get off the manufacturing lines. For automakers, this impacted every level of their organizations.
“It moved from procurement all the way up to the executive team,” Kimbrough says. “The executive teams had to get involved because of the approvals that were needed for purchasing parts at such an exponentially higher PPV than their contracted pricing was. They had to approve of this (we are talking hundreds of millions of dollars) and the overage that they were spending. Budgets were completely blown out of the water.”
When the automakers shut down production lines during the COVID-19 pandemic, they were not anticipating a large demand for new cars, Souza relays.
“Then people came back online, and they saw a very large demand still there from customers to buy new cars,” he continues. “That is when they figured out that the allocation of chips from the chip manufacturers was being given to other industries. They missed the boat on having those chips put aside for them to cover their demands. They were struggling to get allocation from a lot of the manufacturers. They turned off the switch and when they wanted to turn it back on, they found out that a lot of that allocation had been given to different industries that never really shut down.”
How Smith Managed the Shortage
In order to navigate the chip shortage crisis faced by the auto industry, Smith relied on their decades of experience and the relationships they had established along the way. In doing so, the company cultivated new partnerships as well.
“The automotive industry was never a big customer of Smith,” Kimbrough explains. “We can go back 10 years and look at the number of semiconductors and circuits in an automobile and it doesn’t really compare to what an automobile has today. Automakers had to adapt to that as well. Their purchasing teams now must learn and know how to procure integrated circuits, semiconductors, even commodities. These things are basically computers on wheels.”
Though Smith may not have been heavily involved in the automotive industry, the company does have decades of experience when it comes to semiconductors and electronics.
“For Smith, what played to our advantage is that we relied on our 40 years of experience,” Kimbrough emphasizes. “We have a lot of suppliers that we use, that we've developed relationships with, over the decades that we've been in business. Whoever could supply parts to these automotive manufacturers, that was what built the relationship. Even if it was at a high price. We are not setting the price; we are just moving within the market. But, if you want that MCU, that's the price in the market, because it's going to go to the highest bidder. The manufacturers buying these were learning that that's the price you have to pay to keep the automobiles rolling off the assembly line.”
Distribution partners developed a major role to play in the automotive supply chain, Souza explains, and relationships shifted toward direct communication between OEMs and independent distributors like Smith.
“Primarily in the industry, the automakers would depend heavily on their Tier One suppliers to be making the decisions and be procuring the chips for their production needs. When this shift happened, when their Tier One suppliers were no longer able to get the allocation on parts, that is when the OEMs had to build their own strategy internally to control that relationship once again with the chip manufacturers,” Souza says. “It was a very big shift. The industry had let the decision making and the procurement process run through their suppliers and partners, to then actually seeing the impact and the importance of controlling those relationships and negotiations directly. For us, a big shift was our direct customer relationships. We went from dealing with Tier One suppliers to going back to the OEMs and the brand names to negotiate pricing, deliveries and their needs on components. That was a major shift for us.”
As Smith ventured deeper into the automotive industry, they continued to strictly evaluate their supplier base to mitigate risk and ensure quality.
“We weren't using new suppliers that we did not have a relationship with because of the sensitivity of the industry,” Kimbrough says. “We view it as a risk-type application, because a bad part could result in loss of life. Our quality team put together a test suite specifically for any automotive application that we're selling into. We mark it as automotive in the process, so our operations team knows that it's going into that industry, and it must go through a specific test suite that was put together by them. We are ensuring that the parts are genuine, authentic products that have not been altered in any way.”
Another major shift in the way the automotive industry conducted business was an overhauling of their bill of materials. With a lack of design flexibility and minimal alternates accounted for in BOMs, the auto industry faced major obstacles when manufacturers shut down or had no inventory.
“For a lot of the automakers, their bill of materials was very much tied to having one or two components approved for some of the products that they are building,” Souza describes. “They were not used to having a large number of alternates approved for the same use for the part. That is a major bottleneck for them, because if a specific manufacturer is impacted, they are really stuck with one part that they can use. That is the only one approved and verified for their builds, and that put them into a pretty bad situation.”
Smith was able to aid automakers in restructuring their BOMs to better navigate a market shortage.
“We've been doing this for a long time, and, in dealing with different industries, we see the tendencies,” Souza says. “A lot of industries, whenever they're building and designing for a product, they're validating and approving different part numbers and manufacturers to be able to use it in their bill of materials to have flexibility and better costs when it comes down to negotiating their bill of materials.
“At Smith, having our own CRM and our own information for over 40 years, we helped a lot of the automakers by being able to propose alternate part numbers to them so that they could go through the approval process for those parts to be used in their builds,” Souza continues. “It was us putting that information in front of them so that they would be able to make the best decisions on parts. That was key for us.”
“Another key aspect for us was quality procedures,” Souza says. “The automotive industry is very high risk, because we are talking about vehicles and people driving. Having the right certifications and quality procedures in place at all our warehouses to do in-house testing for our partners was key. Agility, certifications and quality procedures to be able to do full authenticity verification on parts—that was the key to support them.”
The Automotive Market Today
Today, the market is oversupplied, Kimbrough explains, as the events that transpired at the early stages of the COVID pandemic set in motion irreversible actions.
“When COVID started, a lot of car manufacturers were trying to cancel their orders with the chip manufacturers,” Kimbrough recounts. “And in doing so they moved production over toward computers and home appliances and things like that, because that's where the demand was. At the early stages of COVID, people were working from home. They needed solutions to do that, and they weren't buying automobiles. The next thing we know, there's a huge demand for cars, and so then automakers tried to place their orders for those chips, but manufacturing had already shifted over to making other products.”
Kimbrough explains that chip manufacturers were having automakers sign Non-Cancelable, Non-Returnable agreements with semiconductor purchase orders to avoid the cancellation of orders as was seen at the onset of the pandemic.
“The chip manufacturers were holding subcontractors and Tier Ones and OEMs to their orders,” he continues. “So, there is just a glut of product sitting on shelves because they are being forced to take all the chips that they did buy. Now, we don't have the demand for automobiles like we used to. That wave of demand has passed, but they're not able to get out of their purchase orders that they placed. The chip manufacturers learned as well; if you want these parts, you're signing an NCNR.”
Kimbrough states that today, we are in an excess market with too much inventory than manufacturing requires. “I don't think it's specific to Europe,” he claims. “We're seeing this globally.”
Lessons Learned and the New Normal
Having gone through the tribulations of the past few years, the automotive industry operates under a “new normal” along with some lessons learned.
One new normalcy, Souza affirms, is the increasing quantity of semiconductors within modern vehicles. And with the understanding that chip count will increase comes the preparations and processes established to ensure flexibility to address supply constraints in the future.
“I think what this situation really brought to the automakers is an understanding that they need to make sure that they have the right processes in place so that they can have the ability to be very competitive and have alternates,” Souza says. “It also brought an understanding of the importance of their direct relationships with the parts manufacturers. It is important to have that relationship with the manufacturers. They must make sure that their demands and forecasts on parts are locked in to make sure that they don't lose parts to other industries. It is important for the OEMs to have those direct relationships with the chip manufacturers to be sure that this doesn't happen again.”
Another lesson learned, Kimbrough says, revolves around supply chain and sourcing diversification.
“There was too much dependence on China within the supply chain,” he says. “When China really locked down, things weren't moving in or out. That was a lesson learned. We are seeing a diversification in the supply chain today, so they are not so reliant on China anymore.
“Secondly, there is the term ‘golden screws.’ These are critical components,” Kimbrough continues. “There are a certain number of components that go into the automobile that if they're not in the automobile, that car won't move. We all saw pictures of the car lots with all the vehicles on it that just didn't have that one MCU in there, so the cars could not be sold. Now, the car manufacturers have learned that they need to figure out a solution that allows them to have the critical components available for maybe at least three months with a buffer-type of stock program somewhere. Maybe that is owned by them or their Tier One, but they need to have that access so the cars keep moving off the lines.”
Smith is Ready for the Shortages of the Future
“This is not the first one. This is not going to be the last one,” Souza claims of supply chain shortages.
“This specific case was very uncommon, because there was a lot of media attention and because of the high impact to customers globally. But really, during our 40 years, we're seeing a shortage every couple of years. There's something that's always going on in the market, especially because the use of chips and technology in our lives is going to continue to grow as time goes on. So, for us, this is something that is very common. We're ready.”
Souza explains that Smith is “in a very good place” operationally and had even opened a new warehousing facility during the shortage—in which the company completes quality control and testing procedures. With facilities around the globe all operating under mirrored procedures and certifications, the assurance of consistency is as widespread as their footprint.
“As a company, operationally, we're ready,” Souza says. “Our systems are ready because we have the system history in place. The supply chain, our suppliers, our certification and testing procedures, everything is aligned to be ready to battle any other shortages that may come up. It is not new for us.”
“One thing we do is we learn, we re-tool and we get better,” Kimbrough adds. “What we learned from this most recent shortage is to restrict the AVL that we're using. We don't want new suppliers introduced to our supply chain that we don't have a relationship with. We want to make sure all our suppliers are vetted and we're getting quality components, and we're also performing the quality checks in-house to make sure these parts are good.”
Souza also emphasizes that it is not just about learning from the shortages of the past but also preparing for the disruptions of the future. This starts with identifying risks in the supply chain.
“That's something that we're very good at as a company that's been doing this for 40 years because we get news from manufacturers, we get news from our customers, and we can see the demand on specific parts that are coming through our global network of customers,” he continues. “We are very proactive as a company. If we're seeing any peaks on demand or possible impacts, maybe it's a tsunami in Taiwan, maybe it's a fire in a certain facility that might be impacting a certain source of components that we know our customers are using, we're being very proactive to put that information in front of our customers so that they can make the best decisions and can see that this is going to be a major impact to production. We make quick decisions on buying inventories and make sure that we have that buffer stock in place.
“A shortage is one thing, and we should be prepared for them. But also, let's be a step ahead,” Souza concludes. “If we see signs of possible impacts, we're putting that information in front of our customers so that they have better information to act a little bit quicker rather than waiting until it's too late.”
